Matlin v. Spin Master Corp.
1:17-cv-07706 | N.D. Ill. | Jun 10, 2019
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 1 of 11 PageID #:1121
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
)
TAI MATLIN and JAMES WARING, )
)
Plaintiffs, )
) No. 17 C 7706
v. )
) Judge Virginia M. Kendall
SPIN MASTER CORP., SPIN )
MASTER LTD., and SWIMWAYS
CORPORATION, )
)
Defendants. )
)
MEMORANDUM OPINION AND ORDER
Plaintiffs Tai Matlin and James Waring have engaged in a protracted dispute,
spanning nearly two decades and four arbitrations, regarding their rights to certain
intellectual property and accompanying royalties. Apparently displeased with the
outcomes of the arbitration process, Plaintiffs filed this lawsuit against Spin Master
Corp., Spin Master Ltd., and Swimways Corporation alleging fraud, breach of
contract, and unjust enrichment. At the core of Plaintiffs’ First Amended Complaint
is their persistent belief that they retained some ownership interest in the
intellectual property of certain “Key Products” and that Defendants assumed
obligations to provide royalty payments to Plaintiffs as a result of obtaining the rights
to the Key Products intellectual property. Plaintiffs’ Complaint was ultimately
dismissed by this Court for lack of personal jurisdiction (Dkt. 40) and the decision
was affirmed by Court of Appeals. (Dkt. 70). Defendants now seek sanctions against
Page 1 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 2 of 11 PageID #:1122
Plaintiffs. (Dkt. 48). Defendants’ Motion for Sanctions is granted as Plaintiffs’ claims
are barred by principles of res judicata and the plain language of the governing
contracts in dispute.
BACKGROUND
For purposes of Defendants’ Motion for Sanctions, the Court assumes
familiarity with the factual background from the parties’ briefing on the Motion to
Dismiss and as discussed in the Court’s Opinion granting the Motion to Dismiss. See
(Dkt. 40). Unlike the factually deferential standard owed to plaintiffs when deciding
a motion under Rule 12(b)(6), the Court need not accept all well-plead facts as true
when reviewing a motion for sanctions. Tobey v. Chibucos, 890 F.3d 634" date_filed="2018-05-15" court="7th Cir." case_name="Edward Tobey v. Brenda Chibucos">890 F.3d 634, 652 (7th
Cir. 2018).
LEGAL STANDARD
Federal Rule of Civil Procedure 11(b) demands that by presenting papers to
the court, the party certifies that the filing is formed after a reasonable inquiry and:
(1) it is not being presented for any improper purpose, such as to harass,
cause unnecessary delay, or needlessly increase the cost of litigation;
(2) the claims, defenses, and other legal contentions are warranted by
existing law or by a nonfrivolous argument for extending, modifying, or
reversing existing law or for establishing new law;
(3) the factual contentions have evidentiary support or, if specifically so
identified, will likely have evidentiary support after a reasonable
opportunity for further investigation or discovery…
Fed. R. Civ. P. 11(b). A frivolous argument is one that is baseless or made without
reasonable and competent inquiry and therefore subject to the consequences of Rule
11. See Berwick Grain Co., Inc. v. Ill. Dep’t of Agric., 217 F.3d 502" date_filed="2000-07-25" court="7th Cir." case_name="Berwick Grain Company v. Illinois Department of Agriculture">217 F.3d 502, 504 (7th Cir.
Page 2 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 3 of 11 PageID #:1123
2000). Rule 11 “plainly authorizes a district court to sanction a lawyer who without
reasonable inquiry tenders a submission that includes legal contentions not
warranted…” Id. at 504. While the Court does have the discretion to issue sanctions,
such authority should be used sparingly in recognition of the impact sanctions can
have beyond the merits of the case. Hartmarx Corp. v. Abboud, 326 F.3d 862" date_filed="2003-04-09" court="7th Cir." case_name="Hartmarx Corporation v. A. Robert Abboud, Spencer Hays, Tom James Company">326 F.3d 862, 867
(7th Cir. 2003). The Court reviews the allegedly sanctionable conduct under a
standard of objective reasonableness and considers whether the offending party
should have known his position was groundless. Cuna Mut. Ins. Soc. v. Office and
Prof’l Emp. Int’l Union, Local 39, 443 F.3d 556" date_filed="2006-03-16" court="7th Cir." case_name="Cuna Mutual Insurance Society v. Office and Professional Employees International Union, Local 39">443 F.3d 556, 560 (7th Cir. 2006).
DISCUSSION
I. Timeliness of Defendants’ Motion for Sanctions
As a threshold matter, the Court must first address Plaintiffs’ contention that
Defendants’ Motion should be dismissed as untimely “where Defendants needlessly
waited months to raise these issues…” (Dkt. 66, pg. 6). However, Plaintiffs’
argument is misdirected, as demonstrated by their resort to non-precedential and
out-of-circuit authority. (Id. at pgs. 6-7). The fact that Defendants waited until after
this Court’s ruling on the Motion to Dismiss does not prevent Defendants from
properly seeking sanctions. “Postjudgment motions for sanctions are permissible so
long as the moving party substantially complies with Rule 11’s safe-harbor
requirement…” Matrix IV, Inc. v. Am. Nat’l Bank & Trust Co., 649 F.3d 539" date_filed="2011-07-28" court="7th Cir." case_name="Matrix IV, Inc. v. American Nat. Bank & Trust Co.">649 F.3d 539, 553 (7th
Cir. 2011). Indeed, the 21-day time-frame mentioned in Rule 11 “is a floor, not a
ceiling.” Id. at 552 (holding that a motion for sanctions filed 23 days after the suit
Page 3 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 4 of 11 PageID #:1124
was dismissed, and two years after Rule 11 notice was originally sent, did not violate
timeliness concerns).
Defendants alerted Plaintiffs to their purported sanctionable conduct on
March 21, 2018, one month after Plaintiffs filed their First Amended Complaint, by
sending a memorandum in support of their yet to be filed motion for sanctions. (Dkt.
48-10). Plaintiffs did not heed Defendants’ warning and their claims were dismissed
without prejudice four months later. (Dkt. 40). Just 26 days after judgment was
entered, and 147 days after serving Plaintiffs with a copy of their motion, Defendants
filed the instant Motion. (Dkt. 48). Defendants undoubtedly complied with the safe
harbor provision of Rule 11 and the timeliness requirements of postjudgment
sanction motions. Matrix IV, 649 F.3d 539" date_filed="2011-07-28" court="7th Cir." case_name="Matrix IV, Inc. v. American Nat. Bank & Trust Co.">649 F.3d at 553 (“[W]e have recognized that the ‘outer
parameters’ for filing motions for sanctions after final judgment is 90 days.”)
Plaintiffs suggest that this perceived delay by Defendants demonstrates bad faith
and gamesmanship. To the contrary, the fact that Plaintiffs “had much more ‘safe
harbor’ time before the Rule 11 motion was filed only underscores the fact that [they]
had sufficient opportunity to decide whether to dismiss [their] suit in response to
[Defendants’] notice.” Id. at 552.
II. Preclusive effect of arbitration proceedings
Issue preclusion, or collateral estoppel, operates to prevent “relitigating factual
or legal issues if ‘(1) the issue sought to be precluded is the same as that involved in
the prior action; (2) the issue was actually litigated; (3) the determination of the issue
was essential to the final judgment; and (4) the party against whom estoppel is
Page 4 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 5 of 11 PageID #:1125
invoked was fully represented in the prior action [i.e., their interests were
represented even if they were not a party in the prior suit].’” United States ex rel.
Conner v. Mahajan, 877 F.3d 264" date_filed="2017-12-05" court="7th Cir." case_name="United States ex rel. Conner v. Mahajan">877 F.3d 264, 270 (7th Cir. 2017) (quoting Dexia Credit Local v.
Rogan, 629 F.3d 612" date_filed="2010-11-24" court="7th Cir." case_name="Dexia Credit Local v. Rogan">629 F.3d 612, 628 (7th Cir. 2010)). The preclusive effect of res judicata and
its related principles is not limited to the four walls of a courtroom. Rather, prior
rulings by an arbitrator are given preclusive effect in later-filed federal litigation.
IDS Life Ins. Co. v. Royal All. Assocs., Inc., 266 F.3d 645" date_filed="2001-09-12" court="7th Cir." case_name="Ids Life Insurance Company and American Express Financial Advisors, Inc. v. Royal Alliance Associates, Inc.">266 F.3d 645, 651 (7th Cir. 2001)
(“Although res judicata and collateral estoppel usually attach to arbitration awards
… they do so (if they do so) as a matter of contract rather than as a matter of law.”).
Courts will afford even unconfirmed arbitration awards preclusive effect “unless
preclusion impinges on the parties’ federal rights.” See e.g., Plastic Recovery Techs.,
Co. v. Samson, 2011 WL 3205349, at *3 (N.D. Ill. July 28, 2011). Where the rights in
question are creatures of a private contractual dispute and not statutory or
constitutional rights, issue preclusion bars subsequent litigation. See e.g., Stulberg
v. Intermedics Orthopedica, Inc., 997 F. Supp. 1060" date_filed="1998-03-16" court="N.D. Ill." case_name="Stulberg v. Intermedics Orthopedics, Inc.">997 F. Supp. 1060, 1067 (N.D. Ill. 1998) (“When
addressing the preclusive effect of an unconfirmed arbitration award that decided
privately negotiated commercial rights, courts are not confronted with the
responsibility of protecting federal rights. Thus, courts frequently afford
unconfirmed arbitrations preclusive effect on subsequent federal proceedings.”).
Here, the operative contract between Plaintiffs and 180s, LLC (formerly known
as Gray Matter Holdings—Plaintiffs’ former employer) is the Withdrawal Agreement.
Section 4 of the Withdrawal Agreement lays out the agreed upon understanding for
Page 5 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 6 of 11 PageID #:1126
how to resolve disputes arising from the contract. Specifically, “any dispute or
controversy arising under or in connection with this Agreement…shall…be submitted
to binding arbitration before a single arbitrator.” (Dkt. 19-1, pg. 9) (emphasis added).
This provision, combined with the parties’ agreement to waive their rights to a jury
trial to resolve contractual disputes (id. at pg. 11), demonstrates a clear intention by
Plaintiffs and 180s for arbitrator decisions to be binding and final. See IDS Life, 266
F.3d at 651. Moreover, the First Amended Complaint seeks relief under common law
causes of action, not statutory or constitutionally granted rights. See McDonald v.
City of West Branch, Mich., 466 U.S. 284" date_filed="1984-04-18" court="SCOTUS" case_name="McDonald v. City of West Branch">466 U.S. 284, 290 (1984) (“And, although arbitration is
well suited to resolving contractual disputes, our decisions … compel the conclusion
that it cannot provide an adequate substitute for a judicial proceeding in protecting
the federal statutory and constitutional rights…”). Accordingly, arbitrator rulings
regarding disputes under the Withdrawal Agreement can be given preclusive effect
in subsequent federal litigation.
A. Prior arbitration rulings
Defendants argue that the issues raised in the present litigation are precluded
by the third and fourth arbitrations between Plaintiffs and 180s. The third
arbitration addressed Plaintiffs’ contention that 180s breached Section 5.9 of the
Withdrawal Agreement by assigning certain rights without Plaintiffs’ consent when
180s entered into the Asset Purchase Agreement with Defendants. (Dkt. 48-4, pg.
10). In resolving this issue, the arbitrator held “that the Asset Sale to Swimways did
not constitute an assignment of [180s] rights and obligations as referred to in Section
Page 6 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 7 of 11 PageID #:1127
5.9 of the Withdrawal Agreement. …thus only the assets included in the transaction
were conveyed to Swimways.” Id. The arbitrator unequivocally ruled that “[t]he
Withdrawal Agreement was not one of the assets transferred pursuant to the Asset
Sale, and [180s] remains responsible for any compensation owed to [Plaintiffs] under
the Withdrawal Agreement.” Id. Further, the arbitrator held that Defendants were
not a successor to 180s and therefore did not assume obligations present in the
Withdrawal Agreement. Id. at pg. 11.
Plaintiffs also brought claims in arbitration stemming from purported
fraudulent representations and filings made to the United States Patent and Trade
Office. The ruling in the fourth arbitration reiterated the third arbitrator’s findings
by unequivocally stating that all intellectual property rights in the Key Products at
issue were transferred to Defendants by way of the Asset Purchase Agreement. (Dkt.
48-6, pgs. 3-4). The fourth arbitrator further held that Plaintiffs retained no rights
or interests in the intellectual property and 180s was “entitled to sell, license, practice
or even abandon the intellectual property.” Id. at pg. 4. Relatedly, Count IV of
Plaintiff’s fourth arbitration claim sought damages due to 180s allegedly filing
fraudulent documents with the USPTO. Id. at pgs. 6-7. The arbitrator found no
evidence to support this claim. Id. at pg. 7. Though, even when the arbitrator
assumed the fraud allegations to be true, he found that Plaintiffs were still not
entitled to relief. Id.
B. Claims in Plaintiffs’ First Amended Complaint
Page 7 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 8 of 11 PageID #:1128
Here, Plaintiffs’ First Amended Complaint is premised on the same
foundational issues previously decided in arbitration. For example, Plaintiffs argue
in their Complaint that Swimways assumed royalty obligations. See e.g., (Dkt. 19,
¶¶ 85, 86 (“Defendant Swimways assumed the terms the Withdrawal Agreement
when purchasing the assets transferred with the Withdrawal Agreement. …
Swimways assumed the obligation of paying royalties to Matlin and Waring pursuant
to the Withdrawal Agreement.”). Indeed, this presumption is fundamental and
essential to each one of the three Counts in the First Amended Complaint. In order
for Defendants to have assumed an obligation of paying royalties to Plaintiffs, they
would have had to assume the obligations outlined in the Withdrawal Agreement—a
possibility the third arbitrator considered and squarely disposed of. (Dkt. 48-4, pg.
11) (“While certain assets of [180s] were transferred in conjunction in the Asset Sale,
the Withdrawal Agreement was not one of them…”). To avoid any doubt, the issue
was reinforced in the fourth arbitration where the arbitrator concluded that “[t]he
Withdrawal Agreement distinguishes between the transfer of assets (e.g., the Key
Product assets and related intellectual property with ‘rights and obligations’ of the
Withdrawal Agreement.” (Dkt. 48-6, pg. 3). The arbitrator went on to find that “(1)
180s owned all rights in the Key Product IP, (2) 180s had the right to transfer its
assets (e.g., Key Products and related intellectual property) to Swimways, (3) 180s
transferred the Key Product assets and related intellectual property to Swimways,
and (4) the [Plaintiffs] were fully compensated for the transfer of the Key Products
and related intellectual property to Swimways.” Id. These rulings make clear that
Page 8 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 9 of 11 PageID #:1129
180s, not Defendants, is the entity responsible for remaining payment obligations, if
any, to Plaintiffs. As a result, collateral estoppel prevents Plaintiffs from attempting
to relitigate the issue of whether Defendants owe them payments under the
Withdrawal Agreement.
Plaintiffs also assert in their First Amended Complaint that Defendants
engaged in fraudulent conduct in certain filings made with the USPTO. See e.g., (Dkt.
19, ¶ 73) (“In fact, Swimways knew it never had full ownership of the rights in Key
Product IP obtained by fraud and forgery…”). This claim is plainly foreclosed by the
previous arbitrations. As discussed above, arbitration unequivocally established that
Plaintiffs retained no ownership interest in any intellectual property associated with
the Key Products, and therefore even if there was any merit to Plaintiffs’ allegations
of fraudulent conduct, they could still not plausibly state a claim for fraud. (Dkt. 48-
6, pgs. 3-4, 6-7). As such, collateral estoppel likewise precludes Plaintiffs’ fraud
allegations in the First Amended Complaint.
The above arbitral findings fit neatly within the four prongs of collateral
estoppel and undercut Plaintiffs’ ability to bring their present claims in good faith.
Whether Defendants assumed royalty obligations to Plaintiffs in the Asset Purchase
Agreement was involved in the third arbitration, it was actually litigated through
summary judgment proceedings, it was essential to the determination of Count II of
Plaintiffs’ Statement of Claims, and Plaintiffs were fully represented in the previous
action. Mahajan, 877 F.3d 264" date_filed="2017-12-05" court="7th Cir." case_name="United States ex rel. Conner v. Mahajan">877 F.3d at 270. The same analysis holds true when considering
Page 9 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 10 of 11 PageID #:1130
the effect of the third and fourth arbitrations on Plaintiffs’ fraud claim in their First
Amended Complaint.
III. Appropriateness of sanctions
A reasonable inquiry by Plaintiffs and their counsel would have revealed that
the claims they sought to bring in the First Amended Complaint were precluded by
the plain language of the governing contracts as noted on multiple occasions in
binding arbitration. See Bethesda Lutheran Homes & Servs., Inc. v. Born, 238 F.3d
853, 859 (7th Cir. 2001) (“[W]hatever the possible merit of the suit, it should have
been obvious to any lawyer that relief was barred on multiple grounds, including res
judicata.”). Choosing to proceed with their federal litigation in the face of such
authority warrants sanctions. “Bringing a claim that is barred by res judicata is
sanctionable.” Singh v. Curry, 69 F.3d 540" date_filed="1995-10-25" court="7th Cir." case_name="Harjit Singh v. Arthur J. Curry, Christine Curry, Sukhjit Gill, Barry H. Greenburg, and Nathan's Deli, Inc., an Illinois Corporation">69 F.3d 540 (7th Cir. 1995) (citing Cannon v. Loyola
University of Chicago, 784 F.2d 777" date_filed="1986-02-25" court="7th Cir." case_name="Geraldine G. Cannon v. Loyola University of Chicago">784 F.2d 777, 782 (7th Cir. 1986)). Even a cursory review of
the arbitration rulings would have revealed Defendants owed no royalties to
Plaintiffs and further, even if Defendants engaged in fraudulent transactions before
the USPTO, Plaintiffs retained no interest in that intellectual property that would
give rise to a plausible claim for fraud. Plaintiffs’ suit was precluded by the plain
language of the contracts, as determined in binding arbitration, but also by clear and
direct holdings in those proceedings. Opting to undertake this groundless lawsuit
was objectively unreasonable and necessitates sanctions. See Cuna, 443 F.3d 556" date_filed="2006-03-16" court="7th Cir." case_name="Cuna Mutual Insurance Society v. Office and Professional Employees International Union, Local 39">443 F.3d at 560.
Defendants are entitled to recover fees and costs relating to the preparation
and filing of their Motion to Dismiss and Motion for Sanctions. The Court finds this
Page 10 of 11
Case: 1:17-cv-07706 Document #: 73 Filed: 06/10/19 Page 11 of 11 PageID #:1131
remedy is appropriate and sufficient to deter repetitive conduct from Plaintiffs and
other similarly situated parties. See Fed. R. Civ. P. 11(c)(4). Given Plaintiffs’ litigious
history and dogged pursuit of previously discharged claims, such an award is both
reasonable and proportionate to the harm caused to Defendants. See Scruggs v.
Wauwatosa Savings Bank, 723 Fed.Appx. 349, 350-51 (7th Cir. 2018).
CONCLUSION
For the reasons stated within, Defendants’ Motion for Sanctions is granted.
Plaintiffs’ claims were precluded by collateral estoppel and had no sound, good faith
basis. Plaintiffs’ First Amended Complaint remains dismissed without prejudice.
Defendants are directed to file a detailed accounting of the attorneys’ fees and costs
associated with the preparation and filing of Defendants’ Motion to Dismiss (Dkt. 26)
and Motion for Sanctions (Dkt. 48) within 14 days of the entry of this Order.
____________________________________
Virginia M. Kendall
United States District Judge
Date: June 10, 2019
Page 11 of 11